Micropayment Impact

2

March 23, 2007

A photographer recently asked, "Does Getty's participation in these new stock licensing models (micropayment) dilute the company's potential future income and the prospects for their shareholders?"

I think there are really two questions and two implied questions here:

1 - "Will micropayments dilute Getty's future income?"



2 - "Will Getty's participation in micropayments dilute prospects for their shareholders?"


Implied questions



3 - "Wouldn't Getty's stockholders be better off if Getty had not purchased iStockphoto?"

4 - "Wouldn't the industry be better off if micropayment did not exist?"

1 - In my opinion there is no question that the existence of micropayment sites will dilute the sales of traditional RM and RF. The only question is how much and how fast.

We can already begin to see the effect it is having on Getty. Total RF revenue in 2005 was $272.91 million. Total in 2006 -- counting micropayment -- was $308.17 million. iStock probably contributed about $20 million to the total RF revenue in 2006 so if we were to remove that from Getty's bottom line total RF revenue would be about $288 million. That's about 5.5% growth in RF for 2006. However, Getty acquired Stockbyte in 2006 and that should have been responsible for some of the RF growth. There are some observers who believe that if we were to take Stockbyte out of the pictures Getty's revenue from traditional RF actually fell in 2006.

Now, compare these numbers with 2005 RF growth compared to 2004. In 2004 total RF sales were $204.53. So the growth in RF sales in 2005 was 33% over 2004. Getty did acquire Digital Vision in 2005 and that was certainly responsible for some of the growth. But, I think the benefit from buying Stockbyte in 2006 should have been about the same as the benefit received from acquiring Digital Vision in 2005.

It seem clear to me that micropayment is having an effect on the growth of RF and it wouldn't be surprising to me if by the end of 2007 total RF sales for Getty, minus micropayments, is less than the 2005 figure of $272.91.

2 - Would it have made any difference whatsoever in the amount of traditional RF that Getty would have sold in 2006 if Getty had not owned iStockphoto. I think the answer to that is absolutely NO. I don't think Getty is doing anything to cause iStock to grow. IStock would have grown on its own whether Getty owned it or not. I don't think Getty is plowing cash into iStock to help it grow. I think iStock is generating more than enough cash on its own to cover the development of the new features it is adding. What's really driving iStock's growth is graphic designers talking to their friends and saying, "Hey, iStock is a great source for pictures."

Keep in mind the Piper Jaffray figures we reported in Story 915. Piper Jaffray found when they surveyed traditional photo buyers in June of 2006 that 62% of the respondents said that they had either used, or would consider using, micropayment images. Six months later by December 2007 that number had jumped from 62% to 77%. Don't be surprised if by the end of 2007 everyone is using micropayment some of the time. More and more of the traditional buyers of stock photography are very rapidly discovering that micropayment images are perfectly satisfactory for some of their applications. Every time one of these traditional buyers purchases a micropayment image it is one less RF image they will buy.

Fortunately, there are new buyers of micropayment images for whom regular RF has been too expensive for a long time. The revenue these new buyers bring into the market makes up, to some extent, for the lost sales of regular RF. But, I don't believe there will ever be enough of these buyers to make up the difference.

3 - Getty's stockholders get the benefit of the cash and profits that iStock throws off so it is better for them that Getty owns iStock than if it didn't.

4 - Would the industry, which we define as all the photographers and stock agencies who have been working in it prior to introduction of micropayment, be better off? The answer is certainly Yes. However, if by the industry we include the people who are operating the micropayment agencies and all the photographers, particularly amateurs and young photographers trying to break in who have been unable to get represented by the major agencies. And if we include, as well, the customers, who now have more choice, the answer is No.

It really doesn't make any difference whether Getty owns iStock or not. IStock and other micropayment sites are here to stay. And they will grow. And the impact they will have on the "industry" will be either negative or positive depending on how you define the word industry and your perspective.

In summary, the existence of microstock will definitely hurt the industry as we know it, and will make it much more difficult, if not impossible, for photographers to MAKE A LIVING producing stock images. That may eventually hurt Getty stockholders (depending on the price at which they purchased the stock, and whether the market has already discounted the impact that micropayment will have on Getty's future earning potential).

Jonathan Klein has said all along that, "It's all about the customers." He can't kill microstock, nor can anyone else. It's here to stay. So the best thing is to figure out how to live with it. And that's what he's doing from the point of view of his corporation, Getty Images. The fact that Getty gets the benefit of whatever revenue iStock generates is better for its stockholders than if the iStock revenue were going somewhere else.

So how do photographers who have been working in this industry for many years and who are trying to earn their full time living "live with it". In my opinion the answer for many will be to get out of the stock photography business as a profession and do something else to make a living. Continue to do stock photography in your spare time as a way of supplementing another source of income, but don't look at it as your sole source of income.